The End Of The Diversification Free Lunch
By Richard Phillips, Chief Investment Officer and Kevin Muir, CFA, Market Strategist, for EastWest Investment Management, and republished here with permission
Today, if the US and Canadian markets were to close the year where they are currently trading, it would mark a very unusual development. In the past three decades, there has never been an instance when both stocks and bonds have had negative return years. Yet here we are with the U.S. stock market hovering around zero while bonds are s
I’m no genius but I’ve seen this for coming for years, the effect of central banks dumping money into the system was the markets key function of price discovery died. Now like a Phoenix it will arise and bath us in fire. HY will return to the Junk it once was. Bonds will have to offer yields that beat inflation. Stocks will have to reflect the actual performance of companies rather than the certainty someone else will come along with more money to buy your shares tomorrow. The only things likely to survive are value creating stocks, hard assets and cash. That’s basically my portfolio now. I am not smart enough to know how to use anything more complicated and I don’t trade what I don’t understand.
Ive mentioned this a few times over the past 2 years. In a dramatic example….all the finance text books for the past 20 years are now, or will be garbage…they are written with an undying faith in the neg stock/bond correlation. it worked since 1981, but prior to that sometimes it was together sometimes apart…but back then people bought bonds and held to maturity….inflation was the most common risk along with credit risk. now its inflation, credit and the perception that rates will move (affecting prices). recent cfa studies show that the long term return of a bond fund, reinvesting interest is the yield at the time of original purchase!
70’s style stagflation is a real risk, as the debt must either be extinguished quickly, or inflated away…..and there are peole who do NOT like money destruction.